Record High Correlation Between The Euro And S&P 500 Is A Bad Sign

RBC Capital’s equity strategist team is concerned that stocks are behaving irrationally.

“In our opinion, nothing about the fundamental backdrop has changed since October 3 to account for the ~15% rally. This pop merely underscores the importance of psychology on short time horizons,” they said in a report to clients this morning.

They note that U.S. markets are increasingly being driven by headlines out of Europe. They point to the record high correlation between the euro and the S&P 500:

EuroS&P Correlation

Photo: RBC Capital Markets

 

 

 

 

 

 

 

 

 

 

 

 

RBC doesn’t have a lot of confidence in Europe.  As such, they’re concerned stocks could correct soon:

The window for the hopeful could slam shut if [European] policymakers do not put something concrete and credible on the table by November 4. The equity rally since early October has pushed share prices into overbought territory even while sovereign spreads have widened and euro-denominated short-term funding spreads have failed to come in.

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